Extra Inherited property - keep as BTL or sell to pay off mortgage?

Discussion in 'General Property Investment Discussion' started by Jaffab, Aug 7, 2019.

  1. Jaffab

    Jaffab New Member


    I need help with some calculations I am doing regarding a property we have been left - whether to rent it out for 4 years, or sell it and repay a big chunk of our main house mortgage.

    Note - before going into the pros and cons of Rentals, we have other properties we rent out through a Ltd company, so we know what we are doing here in this respect - its the maths of rent V mort repayment.

    So the property is in Scotland (in case that makes a difference) and has a value of £120,000. We will eventually sell it - so when we do, I guess there is no way around paying the CGT at the higher rate of 28% (both higher rate tax payers) - so thats £33.6k CGT, leaving £86,400.

    Now comes the complex part - we could either...
    1) Pay the £86400 into our 13 years to go existing £140,000 main house mortgage and thus for the next 4 years (until the remainder is paid off) save the interest of 2.44% - but this would be compounded as whilst the mortgage payments would reduce, we would opt to still pay the balance off faster. If we did this, the Halifax mortgage calculator (see below) would save £20,303 on the lump sum, or £21,794 if we took the roughly saved £1000 a month mortgage payment and overpaid each month.
    2) Defer selling it, and rent it instead - we would get £450 a month (assuming no void months), of this we would pay 40% tax - which is a reduction to £270, then 12 months for 4 years = £12,960. After this, then sell it, pay the CGT (see above) and the maths of the sale are the same.

    So it would seem that the Rental is £7k worse off, but...
    1) Assumes no voids
    2) Assumes CGT does not rise
    3) Assumes property prices does not fall (which is likely)
    4) We would be spending £1k a month extra on mort overpayments

    But this is where it all gets tricky because according to the Halifax mortgage overpayment calculator, on our existing £140k mortgage, the balances with the overpayment of £86k and an extra £1k per month means the balances are as follows:

    Year Zero = £140,000
    Year One = £30,247
    Year Two = £6,139
    Year Three = £0

    Which means actually, we would (in our 4 year plan) have 1.5 years with no mortgage, so saving the £1k mortgage payment and £1k overpayment adds another £36,000 saving onto the mortgage side, thus making the total saving:

    1) Paying off the mortgage = £20,303 interest saving, plus £36,000 non-morgadge payment time, MINUS (£48,000) of £1k a month overpayments for 4 years = £9794 EXTRA
    2) Rental @ £450 minus tax and no overpayment = £12,960 EXTRA

    Or, if I simplify it by taking out the £1k overpayment per month:

    1) Paying off the mortgage = £20,303 interest saving = £20,303 EXTRA
    2) Rental @ £450 minus tax and no overpayment = £12,960 EXTRA

    Do these numbers look correct?
  2. Jaffab

    Jaffab New Member

    Just to clarify the CGT issue (in case it comes up)....
    Its a little bit more complex than I described above - a few years before my Father In Law died, he was given the Right To Buy his council house but didnt want to - so we gave him the money and the house was transferred over to my Wife - so she owns it, and has done for the last 7/8+ years.

    So the CGT would still apply (we paid £17k on the £120k property) - so yes, CGT would be £120k - £17k minus costs.
  3. Longterminvestor

    Longterminvestor Administrator

    Is there no degree of indexation allowed on the base cost of the property to reduce the CGT bill?
  4. Longterminvestor

    Longterminvestor Administrator

    Was the house transferred over as part of your wife's father's will? I always thought there were time limits on when you could resell/transfer a right to buy property after contracts changed hands?

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